On 24 July 2020, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 4.25% per annum. Disinflationary factors continue to exert considerable influence on inflation. Household and business inflation expectations have overall stabilised following a decrease in May-June. The recovery of the global and Russian economies will be gradual despite the fact that the easing of restrictions revives economic activity. In these circumstances, there is a risk that in 2021 inflation might deviate downwards from the 4% target. A significant easing of monetary policy since April aims at curbing this risk and stabilising inflation close to 4% over the forecast horizon. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will reach
If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
Inflation dynamics this year and in the first half of 2021 will be largely influenced by a steep decline in domestic and external demand occurred in the second quarter. The disinflationary impact of weak demand is caused by the economic effects of restrictions. The strengthening of the ruble since April largely offset its depreciation in March containing the upward pressure of the exchange rate on consumer prices. Household and business inflation expectations have overall stabilised following a decrease in May-June.
The dynamics of consumer prices in June was heterogeneous. This was caused, among other things, by the gradual and uneven recovery of goods and services supply as well as by deferred demand given the step-by-step easing of the lockdown regime. The fiscal policy measures supported consumption. Annual inflation increased to 3.2% in June vs 3.0% in May, which is largely explained by a base effect, primarily in movements of prices for fruit and vegetables. According to the estimates as of 20 July, annual inflation was close to 3.3%.
According to Bank of Russia estimates, monthly inflation indicators reflecting the most sustainable price movements are close to or below 4% (annualised). Seasonally adjusted monthly growth rates continued to decline in June and will remain low till the year-end amid subdued demand. However, annual inflation will continue to increase in 2020 due to the low base effect of 2019.
In the context of prevailing disinflationary factors there is a risk that in 2021 inflation might deviate downwards from the 4% target. A significant easing of monetary policy since April aims at curbing this risk and stabilising inflation close to 4% over the forecast horizon. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will reach
Monetary conditions have softened since the previous meeting of the Bank of Russia Board of Directors. Interest rate dynamics in various segments of the domestic financial market was diverging. Credit and deposit rates decreased, inter alia, under the influence of the earlier made decisions on the key rate reduction. Spreads between OFZ and corporate bond yields dropped reaching the levels of early 2020. At the same time, elevated credit risks hinder the decrease in interest rates. Non-price lending conditions continued to tighten in certain market segments. The Bank of Russia’s decisions to cut the key rate, along with a notable yield drop in the OFZ market, as compared with March-April, pave the way for further reduction in interest rates in other financial market segments. Coupled with the Government and other Bank of Russia’s measures, this supports lending, including in the most vulnerable sectors of the economy. The volume of deposits continues to grow as positive real interest rates on them remain in place, taking expected inflation into account.
Economic activity. The Russian economy will be recovering gradually, as the restrictions are being lifted step-by-step. The revival of business activity is still moderate and uneven across industries and regions. In June, the decline in industrial production, the contraction of orders in both external and domestic market, and the growth of unemployment slowed down. Proxy indicators suggest a slight rebound in investment activity. Recovery continues in retail trade and the services sector. Consumer demand was supported by the fiscal policy measures. At the same time, weak external demand coupled with restrictions under the OPEC+ deal lead to a drop in exports, causing an adverse effect on economic activity. Further economic recovery might be unstable due to a fall in incomes, moderate consumer behaviour, cautious sentiment of businesses and external demand-side restrictions.
In these conditions, GDP will decrease by
Inflation risks. Disinflationary risks prevail over pro-inflationary ones. Disinflationary risks under the baseline scenario are chiefly connected with uncertainty as to further coronavirus pandemic developments in Russia and globally, the scale of possible measures to fight it and their impact on economic activity, as well as the speed at which both the global and Russian economies will recover as restrictive measures are mitigated. Persistent changes in the households’ preferences and behaviour together with higher propensity to save might also exert a constraining influence on inflation.
In the short run a number of factors may put upward pressure on prices. This includes disrupted supply chains as a result of the remaining restrictions and the additional costs of protecting personnel and consumers from the coronavirus spread. Short-term pro-inflationary risks might also be connected with a more sizeable than expected in the baseline scenario materialisation of deferred demand for goods and services. The periods of strengthened volatility in global markets can be reflected in the exchange rate and inflation expectations.
Medium-term inflation dynamics will be significantly impacted by fiscal policy, in particular, the scale and efficiency of the Government’s measures towards mitigating the consequences of the coronavirus pandemic and overcoming structural constraints, as well as the speed of the
If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings. In its further key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
In the follow-up to the Board of Directors meeting of 24 July 2020 the Bank of Russia released its medium-term forecast.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 18 September 2020. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.
The reference to the Press Service is mandatory if you intend to use this material.